Default risks loom for nearly $2 trillion of junk-rated debt as US companies hit with higher interest rates

• Default and refinancing risks are climbing for US companies over the next several years, Moody's said.
• Junk-rated firms have $1.87 trillion in debt maturing over the next five years.

Non-investment grade US companies face growing refinancing and default risks with interest rates expected to stay high and financial conditions for borrowers tightening, according to Moody's Investors Service.

The ratings agency says about $1.87 trillion of junk-rated debt is maturing between 2024 and 2028. That signifies a 27% jump from the $1.47 trillion recorded in last year's study for 2023-2027.

Debt maturing in the next two years accounts for about 18% of the five-year total, Moody's said, though the absolute amount for those two years has surged 25% compared to last year's study, to hit $333 billion.

Moody's analysts expect the US speculative-grade default rate to peak at 5.6% in January 2024, before easing to 4.6% by August 2024.

"The increase — reflecting higher maturities for revolving credit facilities, loans and bonds — comes amid weak macroeconomic and credit conditions, raising companies' refinancing and default risk," Moody's strategists said.

The heightened risks stem from the Federal Reserve's historic interest rate hiking campaign and the end of the easy-money era. A higher-for-longer rate environment puts pressure on businesses because borrowing becomes more expensive and investors will demand a higher yield for holding riskier corporate debt.

Companies with ratings of B2 or below have to pay off $206 billion in debt coming due in 2024 and 2025, which will then balloon to roughly $1.1 trillion from 2024 to 2028.

Moody's pointed out that the issuance of credit remains low, with US marketed bank credit facilities for January to September 2023 down 24% compared to the same period in 2022.

"Year-to-date bond issuance is up 26% but remains below pre-pandemic levels, reflecting investors' reluctance to lock in fixed- coupon income while interest rates were rising and companies awaiting a more favorable market environment," the strategists said.

They note though that borrowing costs have come down in the last year as market sentiment has improved and recession fears have ebbed.

Meanwhile, Moody's said the "pull-forward" effect and "amend-and-extend" activity heighten refinancing risk for some corporate loans.

"Companies' tendency to refinance several tranches of debt in a single bank credit agreement when the first tranche, typically a revolver, comes due could more than double their 2024-26 bank debt maturities to over $1 trillion, representing 80% of the total five-year bank maturities."

And, as the share of maturities of lower-rated debt climbs, so too will the risks associated with refinancing.

Debt from distressed companies, or those rated Caa and lower by Moody's, account for 19% of 2024-2025 maturities. That's up from the 16% due in the first two years of last year's study. An increasing number of companies may find it harder to refinance maturities at interest rates they can afford, Moody's said.